Jobs-taxes debate: We settled it once before

Article by: ERIC WIEFFERING

Star Tribune

May 31, 2011 - 9:51 PM

At the end of World War II, Minnesota faced a very uncertain economic future. Personal income per capita had slipped to 30th of the 48 states. Educated young people were leaving the state, and the state's two biggest sectors, mining and agriculture, appeared in decline.

How Minnesota managed to avoid the fate of other principally agriculture-based economies and embark on several decades of rapid economic growth may be one of the great underappreciated turnaround stories of all time. It's particularly relevant these days given the budget stalemate in St. Paul and, more ominously, the dramatic slowing of Minnesota's job-creation engine during the past decade.

Marvin Taylor is not an economist, and he's definitely not a politician. He's a Ph.D. candidate in geography at the University of Minnesota, and he got interested in geography and economic development after witnessing how the construction of the Root River bike trail transformed his hometown of Lanesboro in southeastern Minnesota.

For his dissertation, Taylor decided to look at the debate about Minnesota's future through two men who helped shape the conversation about taxes and investment during critical stages of the debate: James Ford Bell and, a decade later, Gov. Orville Freeman.

Bell had transformed his family's regional grain milling company, Washburn-Crosby, into a consumer products company, General Mills, in part because of the diminishing importance of Minnesota as a milling center. Named chairman of the largely moribund Minnesota Resources Commission in 1943, Bell believed fervently in the need to diversify and strengthen Minnesota's economy so that it relied less on agriculture and mining. In his mind, that meant attracting more investment capital -- which he called "adventure capital" -- that could seed new companies and industries.

This wasn't the institutional venture capital that we think of today, but something more akin to "angel" investments in new businesses made by wealthy individuals. Freeing up more of that money would require lowering the income tax rates on the state's wealthiest residents.

Taylor says Bell wasn't the first to suggest that personal income tax rates could be, to use a modern-day phrase, "job killers." Twin Cities business leaders at the time, including 3M CEO William McKnight, argued that venture capital was the "secret of America's greatness," and that the individual income tax was its greatest threat.

Bell didn't disagree, but Taylor says he also recognized that Minnesota couldn't simply cut taxes and hope for the best. Specialized, high-value manufacturers required a highly educated workforce, which meant the state needed to continue making significant investments in education. To fund those investments, and to replace the lost income tax revenue, Bell and other Twin Cities business leaders advocated a statewide sales tax, a notion rejected by politicians at the time.

Still, the debate about tax rates and job creation continued, particularly at the Legislature. In 1955, Freeman called for the formation of a special committee to study how business, labor and the University of Minnesota could partner to build a more productive business climate.

The 20-person committee included equal representation from business, labor and agricultural interests. The committee was self-funded, to the tune of about $400,000 in today's dollars. The money was raised from companies and unions, and it was used in part to hire an economic research staff.

The committee's 600-plus page report, issued in 1956, brought hardheaded, factual analysis to an issue that had relied largely on anecdotal evidence. It emphasized what Bell had said a decade earlier, that the state's best prospects for growth would come from attracting or nurturing manufacturers of high-value, low-bulk products employing skilled labor. Like Bell, the committee also concluded that a sustained investment in education would be essential to attracting and retaining those kinds of industries.

Where the report diverged from Bell was on the question of taxes. While offering many recommendations to address inefficiency and inequity in the administration of taxes (especially property taxes), it found no conclusive evidence that personal or corporate income tax rates influenced business location decisions.

Taylor calls the study one of the state's more remarkable public policy undertakings. Its members included the state's most prominent bankers and CEOs, union leaders and a future economic adviser to two U.S. presidents. The committee's final document included no dissenting opinions or minority reports, and thus essentially deflated the argument that taxes were a critical matter in business location decisions. At least for a time.

More important, Taylor believes the report helped forge and solidify statewide consensus around the value of long-term investments in things like transportation networks and, in particular, education.

That consensus was reflected for many years in the level of support the state provided for the University of Minnesota. For decades, Taylor said, the state contributed an average of about $2.50 for every $1 in tuition income, and as recently as 1979 it was $3.80. Today, that ratio is closer $1 worth of state aid for every for $1 in tuition.

The irony is that, while Bell, Freeman, McKnight and others were worrying about future growth, the very industries they were hoping to nurture, research-based specialized manufacturing, were taking root right under their noses -- thanks in large part to decades' worth of state investment in education.